What is the Central Banking System?

WHAT IS CENTRAL BANKING SYSTEM?

Before the World War First, there were only a few countries which had their own central banks. After the War, the number of central banks has increased and now there is not a single country in the world which does not have its own central bank.

There were many considerations underlying the establishment of a central bank. After the First War, there was complete confusion in currency and exchange markets. There were large withdrawals of money from banks. The bank reserves fell below the needed levels. There was no institution which could supervise the working of banks and also serve as a fiscal agent. In addition to the above difficulties, there was rigidity or lack of elasticity in the supply of currency. There were also reoccurrences of failures among the commercial banks. In order to solve the monetary problems of the countries and set them on healthy footings, a Conference was held at Brussels in 1920. It was decided in that Coherence that to control the supply of money and credit in the economy and maintain stable business conditions, each country must establish its own central bank.

The  central  bank  of  Pakistan  named  as  State  Bank  of Pakistan  (SBP) was established in July 1, 1948. It is the main monetary authority in our Country. According to the State Bank of Pakistan Act 1956, the SBP is charged with regulating the monetary and credit system of Pakistan.

Asset Structure

The asset structures of the central banks differ from country to country. In some countries, the central banks are nationalized. For example, Bank of France (1800), Reserve Bank of India (1947) is nationalized. They are owned and operated by their governments. The Federal Reserve System of America (1914) and Netherlands (1814) are private banks. The bank of Japan and State Bank of Pakistan (1948) had mixed ownership. The Government owned 51% of the share capital of SBP and 49% were held by the public. Now it is fully state owned after the Nationalization of Banks in 1974.

Organization

The Organization of the central banks is also not the same. For example, the organization of Federal reserve System comprises five agencies or group of agencies; (1) The Board of Governors; (ii) The Federal Open Market Committee; (iii) The Federal Advisory Council; (iv) The Federal Reserve Banks and their branches; (v) Member Banks of Federal Reserve System.

The State Bank of Pakistan as envisaged in the State Bank Order is not guided by profit motive in its operation. It is to regulate the monetary and credit system of Pakistan and to foster its growth in the best national interest with a view to securing monetary stability and fuller utilization of the country’s productive resources. The general supervision and direction of the affairs of the Bank vests in a Central Board of Directors which consists of one Governor, one Deputy Governor, and eight Directors. There is also an executive Committee which is empowered to transact business on behalf of the Central Board of Directors.

In order to regulate and monitor the banking system, the central bank issues laws and regulation from time to time. These regulations provide guidelines for opening of accounts, limit against advances, setting up internal audit system, requirement for minimum capital and reserves for banking company, maintenance of liquidity assets for. Every banking company etc.

In short, a central bank is an apex institution in the country. Its objectives are to oversee the banking system in a nation by acting as a banker to the central govt. It is fully charged with the responsibility for maintaining the internal and external stability of-the country. In developing countries the central bank is also responsible for directly contributing in the promotion of planned economic development of the economy.